How different could 2020 be?

PERU - Report 27 Dec 2019 by Roberto Abusada and joval

The electoral campaign to replace the dissolved Congress seems to have failed to gain momentum. The latest polls find that nearly half of voters haven’t decided who to vote for in the January 26th contest. While some surprises could emerge, the results will most probably favor President Martín Vizcarra. No party is likely to obtain a significant majority, and only six or seven of the participating parties are likely to amass the 5% of votes necessary for representation. Vizcarra could approach some of the winning parties, especially those at the center or center-left (such as Accion Popular, Alianza para el Progreso and Partido Morado). Keiko Fujimori’s Fuerza Popular party will certainly secure an important presence in the new Congress, though in a much reduced number.

The lack of strong ideology will tilt the general attitude of the next Congress toward a collaborative rather than an antagonistic stance. However, this shouldn’t be construed as increased probability for the enactment of important structural reforms during Vizcarra’s remaining 18 months in office. We expect the tendency to be one of adopting only uncontroversial measures, and possibly populist ones. Much needed (and politically costly) economic reforms will most probably be left for the next administration. But other important measures on the judiciary and the political system may remain under consideration.

A fragmented Congress would make it extremely difficult to adopt any changes to the current market-friendly economic model of the present Constitution, changes the entrepreneurial class once feared. While we continue to believe that Chilean-style social unrest has a low probability of happening in Peru, the constitutional changes in Chile may serve as a basis for debate in Peru. Still, no significant changes in Peru’s Constitution are likely to occur before the April 2021 general elections.

Growth in October, at 2.1% y/y, was again disappointing, and we’re expecting a 2.2% figure for the year. While that trend compares favorably with regional peers, it’s dramatically below the widely-predicted expansion of some 4%. We project 2020 growth at about 3.2%.

The sol, along with other Peruvian financial assets, sustained a strong appreciation in December of 2.2% m/m, after depreciation peaked at the end of November, on the heels of the easing of U.S.-China trade war tensions. The sol has gained 1.7% since the end of 2019.

Inflation will end 2019 at 1.9% or 2%, and the rate is expected to remain constant through 2020. The 2019 fiscal deficit will barely exceed the equivalent of 1.7% of GDP The government has stretched the exceptional rule to allow a more gradual path of consolidating the deficit.

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